Corporate Finance & Capital Market Update │May 2020
- Introduction
- Issuers
- Intermediaries / Crowdfunding Portals
- Investors
- Offerings / Securities
- Digital Commodities Investment Platform
- Penalty
- Comment
Introduction
With the sustained interest in crowdfunding as an alternative means of raising capital, the Securities and Exchange Commission's ("SEC" or "the Commission") recently released exposure draft of its proposed regulations ("Proposed Rules") for crowdfunding in Nigeria is a welcome development. See our previous article on crowdfunding in Nigeria for a general background.
The following provides a guide to the main rules applicable to issuers, intermediaries, and investors.
Issuers:
Dos |
Don'ts |
| All MSMEs incorporated as a company in Nigeria with a minimum of two-years operating track record are eligible to raise funds through a Crowdfunding Portal, in exchange for the issuance of shares, debentures, or such other investment instrument as the Commission may determine from time to time. | Companies with more than N500,000,000.00 (five hundred million Naira) in assets cannot raise funds through a Crowdfunding Portal registered in Nigeria. |
| An Issuer must be accredited and/or accepted by a Crowdfunding Portal to utilise its platform. | An Issuer shall not host an offer concurrently on multiple Crowdfunding Portals. |
| The issuance of securities or other investment instruments shall be conducted through a registered Crowdfunding Portal. | Entities with complex structures; public listed companies and their subsidiaries; companies with no specific business plan or set up solely to merge with or acquire an unidentified entity; and companies that propose to use the funds raised to provide loans or invest in other entities are prohibited from raising funds through a registered Crowdfunding Portal. |
| An Issuer may offer or sell securities through a Crowdfunding Portal without prior registration of the securities, subject to limits on capital it can raise during a 12-month period. | A Micro enterprise shall not raise more than N50m
within a 12-month period.
A Small enterprise and a Medium enterprise shall not raise more than N70m and N100m respectively, within a 12-month period. |
| Where an MSME is a public company or becomes a public company by default (by having more than 50 members at the end of a funding round), the securities must be registered with the SEC when it reaches its funding target, and before the Crowdfunding Portal transfers the funds to the company. | An Issuer shall not directly or indirectly pay a commission, finders' fee, referral fees or similar payment to any person in connection with an offering other than to the Crowdfunding Portal or to persons as compensation for their services to an issuer in preparing materials in connection with the offering. |
| An Issuer proposing to be hosted on a portal shall
submit the relevant information to the Crowdfunding Portal,
including the following:
(a) the key characteristics of the company; (b) the purpose of the listing and the targeted offering amount; and (c) audited financial statements of the company. |
An Issuer shall not post the offering document on any other website apart from the Crowdfunding Portal. |
| Issuers seeking to raise funds shall issue an offering document. The document must be short, easy to read, and standardised with hypertext links, to give easy access to detailed information. | An Issuer shall not offer "non-permissible investment instruments". That is, any investment instrument other than plain vanilla bonds/debentures, ordinary shares and simple investment contracts. |
| Issuers must obtain a signed risk acknowledgement form from each investor, confirming that he/she falls within the investment limits and acknowledges the risk associated with the investment. | An Issuer shall not commence a new crowdfunding offering earlier than 90 days after the withdrawal of an offer. |
| An Issuer must meet the prescribed minimum threshold for the target amount within 60 days or withdraw the offer. | |
| An Issuer shall provide an investor with a contractual right to withdraw an offer or agreement to purchase the securities or investment instrument by delivering a notice to the funding portal within 48 hours after the close of the offer. | |
| An Issuer with a successful funding round on a Crowdfunding Portal shall comply with ongoing disclosure requirements. |
Intermediaries / Crowdfunding Portals:
A Crowdfunding Portal ("CP") is considered to be in Nigeria if the platform is operated or maintained in Nigeria, or located outside Nigeria but actively targeting Nigerian investors, or the component parts of the platform when taken together or in isolation is located outside Nigeria.
Dos |
Don'ts |
| Every platform that facilitates interaction between fundraisers and the investing public for the purpose of any investment-based crowdfunding shall be registered with the Commission as a CP, with a minimum paid-up capital of N100,000,000.00 (one hundred million Naira). | The Commission may revoke the registration of a CP where the operator fails to operate or maintain the Crowdfunding Portal for a consecutive period of 6 months. |
| Only entities pre-registered with the Commission under the Investments and Securities Act 2007 and SEC Rules as an Exchange, Dealer, Broker, Broker/Dealer or Alternative Trading Facility may operate a Crowdfunding Portal and be registered as a Crowdfunding Intermediary. | A Crowdfunding Intermediary shall not allow an Issuer access to the Portal, if the Portal or any of its officers, directors, significant shareholders, or associated persons beneficially own or control more than 5% of the securities of that issuer. |
| The operator of the CP must also be registered with the Commission as a Crowdfunding Intermediary. | The operator shall not discontinue the business or operations of a CP without prior approval of the Commission. |
| A Dealer who subsequently registers as a Crowdfunding Intermediary will be considered a Restricted Dealer and will be restricted to solely carrying out crowdfunding activities under the Proposed Rules. | The Crowdfunding Intermediary is prohibited from providing financial assistance to investors for the purpose of investing in an offer hosted on its platform, soliciting investments or making recommendations, and acting as an intermediary of secondary trades for securities issued pursuant to the rules. |
| A CP shall carry out a due diligence on prospective issuers intending to use its platform. | |
| A CP shall monitor the conduct of Issuers and take action against misconduct or breaches. | No operator or associated person of an operator of a CP shall effect any transaction in, or induce the purchase or sale of, any security or investment instrument by means of, or by aiding or abetting, any manipulative, deceptive or other fraudulent device or contrivance. |
| A CP shall monitor investors to ensure that the investment limit imposed on the investors are not breached. | A CP and its directors and executive officers shall not lend or finance or arrange lending or finance for an investor to purchase investment instruments under an offer. |
| A CP shall prescribe the minimum threshold for all offers on its platform which shall not be less than 50%. | |
| Where an investor cancels the offer or agreement to purchase securities or investment instruments, all funds which may have been debited from or blocked in the account of the investor shall be refunded or released within 48 hours of the request to cancel. | |
| A CP shall comply with all regulations and file all quarterly, monthly and yearly reports with the Commission. | |
| A CP shall establish appropriate safeguards for ensuring the integrity of the information received and published; the security and confidentiality of information collected from investors; and maintain reliable and secure operating systems. | |
| Every CP shall appoint a custodian, who shall establish and maintain a separate trust account for each funding round on its platform with a financial institution registered by the Commission as a Custodian. | |
| Every CP shall display a warning statement on the home page of the portal, subscription landing page, and all application forms for investing, warning investors of the risk of investment. | |
| A CP shall preserve records relating to an investor (who registers, purchases or attempts to purchase securities on the portal); records relating to issuers who offer and sell or attempt to offer and sell securities through the portal; and records of daily, monthly and quarterly summaries of transactions effected through the portal in an accessible place. These records shall be preserved for a period of at least 7 years. |
Investors:
Under the Proposed Rules, an Investor is any person or entity that seeks to make, is making, or has made an investment in an investment vehicle with the expectation of achieving returns.
Dos |
Don'ts |
| Investors can invest in companies hosted on the Crowdfunding Portal subject to the investment limit specified by the SEC from time to time. | Retail investors are prohibited from investing more than 10% of their annual income in a 12-month period. |
| Investors will be given a cooling off period of 48 hours from the date of close of the offer within which they may withdraw their investment. | Investors are restricted from transferring their securities or investment instrument for a period of 1 year, except the transfer is made to the Issuer or to an institutional investor, or forms part of an offer for sale registered with the Commission. |
| If there is a material adverse change affecting the project or the Issuer, investors may rescind the investment within 7 days from the date the material adverse change became public. |
Offerings / Securities:
Dos |
Don'ts |
| Investors may withdraw their investment within 48 hours of the close of the offer. | A crowdfunding offering shall not remain open for more than 60 days. |
| Where an Issuer is unable to meet the prescribed minimum threshold (not less than 50% of target amount), the offer must be withdrawn, and the Crowdfunding Portal shall refund all investors within 48 hours of the end of the offer. | Where an offer is withdrawn because the Issuer could not meet the prescribed threshold, the Issuer shall not commence a new crowdfunding offering until 90 days after the withdrawal. |
| Where the amount raised meets the prescribed threshold, but falls short of the target amount, the Issuer will be required to provide the investors and the portal with a revised plan for the proposed use of the funds raised. | Where the amount raised falls short of the target amount, the Issuer will not receive the funds unless the underlying project for which the fund was raised can be downscaled and executed independently without negatively affecting the operations of the Issuer. |
| Where the funding target is reached, the Crowdfunding Portal shall make funds available to the Issuer within 24 hours of the cooling off period. | Where the funding target is reached, the Crowdfunding Portal shall not transfer the funds to an Issuer that is a public company or a public company by default, until it receives evidence of registration of the securities with the SEC. |
| The funds raised for each funding round shall be maintained in a trust account by a custodian (usually a financial institution) appointed by the Crowdfunding Portal and released to the Issuer upon the fulfillment of specified conditions, such as the minimum threshold or target amount being met. | |
| A Crowdfunding Portal shall take all reasonable steps and establish measures by which it is able to verify that the proceeds raised from its platform are utilised for the stated purpose. | |
| The Issuer is mandated to notify investors of any material adverse change ("MAC") within 24 hours after becoming aware. Where there is a MAC affecting the project or Issuer, an investor may withdraw his investment within 7 days from the date the MAC became public. |
Digital Commodities Investment Platform:
A Digital Commodities Investment Platform ("DCIP") is defined under the Proposed Rules as a digital platform that connects investors to specific agricultural or commodities project for the purpose of sponsoring such projects in exchange for a return.1
Dos |
Don'ts |
| A DCIP is permitted to provide crowdfunding portal services as prescribed in the Proposed Rules. | A DCIP is prohibited from hosting commodities investments projects on crowdfunding platforms which it controls directly or indirectly. |
| If in operation prior to the commencement of the Proposed Rules, it must apply for a "No Objection" from the Commission to continue to operate as a DCIP. | A DCIP shall not be registered as a fund manager. |
| An MSME operating as a DCIP is not subject to the limit placed on the amount that may be raised by an Issuer. | |
| A DCIP shall ensure that due diligence is carried out on projects and project owners. | |
| A DCIP shall provide an investor or his appointed agent with adequate access to inspect projects to which they have provided sponsorship any time within the project cycle. |
Penalty
Any Crowdfunding Portal or Crowdfunding Intermediary that fails to comply with the Proposed Rules shall be liable to a fine of not less than N1,000,000.00 (one million Naira) and the sum of N10,000.00 (ten thousand Naira) for every day the violation continues.
Comment
The Proposed Rules permit equity or investment-based crowdfunding in Nigeria, allowing companies to legally raise funds from the public through a crowdfunding portal. Therefore, Crowdfunding Platforms involved in other forms of crowdfunding that do not involve issuance of securities, such as donation crowdfunding, will not be required to register with the Commission.
However, several concerns arise from our consideration of the Proposed Rules, as follows.
The minimum share capital requirement of N100,000,000.00 (one hundred million Naira) for Crowdfunding Platforms seems excessive. This will probably lead to mergers between existing crowdfunding platforms that intend to offer investment-based crowdfunding. Furthermore, the maximum amount that can be raised by Issuers is restrictive. The consequence of this restriction is that crowdfunding may not be a suitable source of finance for companies involved in capital-intensive industries. This will ultimately limit the use of crowdfunding.
Another concern worthy of consideration is the plethora of obligations placed on Crowdfunding Portals, one of which is to take reasonable steps to verify that the proceeds raised through its platform are used for the stated purpose. Issuers are required to file an offering document disclosing the proposed use of the proceeds and there are stakeholders (i.e. investors/shareholders and industry analysts) that can monitor the use of the proceeds. We think that it will be a herculean and resource-demanding task for CPs to fulfill this obligation.
It is also noteworthy that while penalties are imposed on CPs and Crowdfunding Intermediaries, there are no specific penalties imposed on the Issuer for breach of its obligations under the Proposed Rules. Also, investors are placed in a precarious situation by the absence of a secondary market function in the CPs. The existence of a secondary market for crowdfunded securities will create liquidity and an exit for crowdfunding investors.
Furthermore, the position of the DCIPs is unclear in the Proposed Rules. The language of the rules implies that they may function as both a CP and an Issuer. However, when they intend to raise funds for projects, they are prohibited from raising such funds through CPs they control directly or indirectly. This limitation may have been placed to promote transparency, but the SEC should make the rules clearer and the justification more explicit.
The Proposed Rules have been exposed by the SEC to receive comments from stakeholders. An updated Note will be published as soon as the finalised rules become effective.
Footnote
1 Popular examples of DCIP Platforms in operation in Nigeria are FarmCrowdy, ThriveAgric, Farmkart, PorkMoney and TushFarmer.
Originally published May 5, 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
